US listings back in favour after China tech firms’ Hong Kong IPOs fail to take off, says JPMorgan

Poor performance by newly listed stocks is undermining Hong Kong’s ambition to rival the United States as a hub for technology flotations, and Chinese technology companies are once again favouring US listings, according to JPMorgan.

Hong Kong emerged as first choice after the city’s bourse operator, Hong Kong Exchanges and Clearing, in April carried out its biggest reform in 25 years, according to John Hall, co-head of investment banking coverage and technology, media and telecommunications (TMT), Asia-Pacific at JPMorgan, the largest bank in the US in terms of assets.

Six months after the largest listing reform in three decades, what has Hong Kong exchange gained?

“Before the reform, 90 per cent of Chinese technology companies chose to list in the US. After the reform, nine out of 10 Chinese technology companies chose to list in Hong Kong,” Hall said in an interview during the bank’s annual TMT Conference last week.

But more than six months later, the trend is shifting back to the US. “Now it has gone down to about five out of 10 that choose to list in Hong Kong, and the rest want to list in the US. The post listing performance of these companies shows Hong Kong does not have a deep pool of investors like the US,” he said.

According to JPMorgan, 2018 has been the strongest year ever for China technology IPOs. And after HKEX approved listings by dual-class shareholding companies as well as biotechnology companies without revenue, Hong Kong attracted dozens of applications and IPOs such as that of Xiaomi, the world’s fourth-largest smartphone maker.

But share performance has been disappointing. Four out of the five companies that listed under the new rules either reporting a flat trading debut, or fell on their first trading day, according to Bloomberg. Long-term investors too have lost out, with five stocks falling 20-56 per cent below their listing prices.

“The market performance of some of these IPOs in Hong Kong was hit hard by volatility. This has led some Chinese technology companies to opt for listing in the US, where there is a deeper investor base for technology companies,” said Hall.

He said the US was also more flexible when it came to pricing an IPO and successfully executing smaller deals. “In the US, a small offering of US$200 million is completely doable. Hong Kong tends to require larger sized offerings,” said Hall.

But Hong Kong has the potential to catch up. “Hong Kong investors understand the China market better than US investors, although they have less knowledge of the technology sector and less experience valuing fast-growing businesses,” said Hall.

“Hong Kong remains a very attractive place for companies to go public. Having 50 per cent of technology firms want to list here is very good. If the share performance of IPOs improves, Hong Kong may get 70 per cent of Chinese technology firms to list here,” he said.

Hong Kong reclaimed the crown of No. 1 IPO market worldwide in terms of funds raised by all companies in the first nine months this year. But US exchanges raised US$18.31 billion year to date until Friday through 49 TMT flotations. Over the same period, Hong Kong raised US$14.67 billion through 29 TMT listings, according to Refinitiv.

In the five-year period between 2013 and 2017 before the HKEX reform, the US reported 264 TMT listings, raising a total of US$94.52 billion, far more than Hong Kong, which reported only 90 such IPOs, raising US$10.58 billion, according to Refinitiv.

Jennifer Nason, global chairman for investment banking at JPMorgan, was optimistic about the IPO market and said next year onwards a number of blockbuster technology IPOs, including those of Uber, Ant Finance and Lufax, could take place.

“There are many innovative start-ups in Asia and China that need to raise funds for their development. When the market is down, they may delay for a while. But if they wait too long, the price may get even lower,” she said.

“Companies with the right assets can go ahead with their listing plans to raise funds to expand their business. They may need to accept lower valuations now, but the fundraising could help enhance their competitiveness for the longer term,” she said.